Real estate can be a tricky market to master. If you’re buying your first starter home or buying a second rental property, there are a lot of moving pieces, many of which are likely new to you. Like any other new venture in life, you’re bound to make mistakes, especially when it comes to the complexities of investing in real estate. To create the smoothest experience and make the smartest choices with your money as you enter the market, avoid these three missteps.
1. Being Unaware of the Costs
Especially if it’s your first home, you can have a hard time keeping track of all of the money that goes into the buying process. Beyond the price of the property itself, you will deal with closing costs, realtor expenses, and down payments, which can easily creep up into the thousands.
While down payments are flexible, professionals advise putting down 20% of the total cost of the home in cash upon purchasing. This can most definitely be a risky amount for some buyers to part with and can take years of saving in order for that number to be feasible. For example, if your desired home is tagged at $150,000, then the $30,000 down payment might not be a realistic amount of money to take out of your savings.
However, there are mortgage options that have looser guidelines. FHA loans, for example, only require a 3.5% down payment. Thinking back to that $150,000 house, a near $5,000 down payment sounds much more feasible. If you’re worried about being able to afford a down payment along with thousands of dollars in closing costs and other expenses, an FHA loan could be a practical mortgage option for you.
Even after purchasing, there will be a lot of recurring expenses like your mortgage bill, interest payments, private mortgage insurance, maintenance, and property taxes. Without some financial preparation and saving, the weight of these expenses can wreak havoc on your financial health in the first few years of homeownership.
2. Lack of Financial Preparation
With all the financial obligations coming your way, it’s time to do a serious financial self-evaluation before deciding if you’re really ready to buy a home. The first step is to evaluate how much you have saved, and whether you have enough of a cushion in your account to dish out for those initial expenses.
It’s also important that you don’t commit to a mortgage when you have a hefty amount of debt already tied to your name. The amount of debt and debt history all impact your credit score, and requirements for mortgages often list a minimum credit score along with a debt-to-income ratio to be considered for approval.
Government-backed FHA loans can require a credit score anywhere from 500-580 as less risk is involved. On the other hand, conventional loans require a minimum score of 620. These loans are also more strict as they require a debt-to-income ratio between 45-50%. Your DTI ratio is a number that represents your creditworthiness based on your current debt compared to your total income.
To avoid getting in over your head, find ways to increase your credit score and save money years before buying. Take any opportunity you can to pay down outstanding debt and build up your savings to make sure you don’t default on your loan and ruin your family’s financial health for years to come.
3. Doing It All On Your Own
Real estate is an ever-changing, risk-filled market, so it’s easy to be unaware of the best courses of action and make mistakes. That’s why it’s so important to seek the advice of experts in the industry, whether that be a real estate agent or simply another homeowner who likely made the same mistakes you’re trying to avoid.
Real estate agents will know the correct price of a home and how to make the best use of your money. They’ll help you avoid overpaying, wasting time looking at the wrong homes or neighborhoods, and skipping important steps and paperwork.
Most importantly, they’ll know the ins and outs of the current market and who offers the best rates and mortgage terms that will best suit your situation. Are interest rates high or low right now? When is the best time of year to buy a home in your area?
Especially in times of economic uncertainty like today, a trusted real estate agent can help you make the most informed decision regarding your home purchase. You can also learn from the mistakes of family and friends who’ve gone through the home buying process. Ask questions along every step of the way to avoid making any irreversible decisions and improve your home buying experience.